Pharma in The New Health Economy: Pressures From Accelerating Market Trends

Health care reforms aimed at reducing medical costs will affect pharmaceutical companies in different ways than expected, thanks to accelerated changes by payors and providers. In a piece published by In Vivo, we look at the three big trends that will reshape the pharmaceutical market – faster than you think.

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Pharma In The New Health Economy: Pressures From Accelerating Market Trends
Health care reforms aimed at reducing medical costs will affect pharmaceutical companies in different ways than expected, thanks to accelerated changes by payors and providers. The three big trends that will reshape the pharmaceuticals market – faster than you think.
BY Rick Edmunds, Joyjit Saha Choudhury, Paul D’Alessandro, and Nelia Padilla

Three trends designed to reduce • 

medical costs will reshape the US health care system in different ways than many industry observers anticipated.


These trends will impact patients’ ac• 

cess to branded drugs over the next few years, and will put pressure on pharma margins as payors, providers, and employers seek to reduce health care expenditures.

There are specific steps that phar• 

ome things never change. A drug that has a major impact on disease, is differentiated, and is reasonably affordable will almost always be a winner. Beyond that certainty, health reform will change the US health care system more dramatically than many foresaw. Spending on branded drugs will probably come under significant pressure sooner than the industry expects – unless pharmaceutical companies can quickly and effectively counterbalance the pace and extent of these forces. To better gauge industry thinking on key trends impacting the pharmaceuticals industry, we asked 43 senior pharmaceutical executives to assess health care trends that will reshape the US market. Their input, from a wide range of perspectives, centered on three primary trends that will significantly impact patients’ access to branded drugs over the next three to six years:

mas need to take now to counterbalance the pace and extent of these market shifts.

• The rapid rise of high-deductible health plans (HDHPs) • Tighter control of clinical care by hospitals The spillover effect of the expanding role of government • 
as a regulator and payor Not surprisingly, all three trends put pressure on pharmaceutical margins, as payors, providers, and employers seek to reduce health care expenditures. But these forces are intensifying faster than many observers expected. To win in this shifting landscape, pharmaceutical companies must have a seat at the table with integrated provider systems and other stakeholders during the development and validation of clinical pathways and protocols. They also need broader and deeper relationships with consumers, to improve access to drugs and educate patients. Further, they need to anticipate and prepare for changes resulting from private payors applying medical cost reduction measures from government programs to the commercial side.

Executive Summary >> 48

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BioPHarma strategies
Trend 1: High-Deductible Health Plans
While private and public health exchanges have been much in the news lately, the increasing role of exchanges is not the biggest or most direct driver fueling “consumerism” in health care spending. Instead, it is the accelerating application of heavy consumer cost-sharing benefit designs such as high-deductible health plans in all major commercial coverage categories. By 2020, across all commercial employer segments, 45% of employees will be covered under an HDHP. (See Exhibit 1.) For healthy employees choosing their own plans on a private exchange, HDHPs are attractive options. Because they expect few out-of-pocket health care expenses, approximately 45% of these people are choosing high-deductible benefit packages. Even more dramatically, 85% of employees on public exchanges are now selecting highdeductible silver or bronze plans. An increasing number of employersponsored insurance plans (ESIs) are also selecting HDHPs to curb the overhead costs associated with health insurance and spread the cost burden. In many of these cases, employees have no choice – the HDHP is the only option. Unlike traditional employer plans, HDHPs typically do not provide drug coverage until after deductibles are met. The average HDHP deductible is $2,000 – and is likely to rise to $2,500 by 2020. Furthermore, many HDHPs include a fourth specialty tier in their formularies. Branded drugs are pushed into the third and fourth tiers, with generics and preferred brands dominating the first two tiers. Instead of a co-pay at the fourth tier, patients may be billed a percentage of a specialty drug that costs tens of thousands of dollars – a sum in stark contrast to a $50 co-pay.

Exhibit 1

Commercial Employee High-Deductible Health Plans By Channel 1% 2%
26% on HDHPs

5% 2%
36% on HDHP

13% 2% 29%
45% on HDHPs



 Private exchange  Public exchange 74% 64% 55%  Employer-sponsored insurance  Non-high-deductible health plan




Note: Based on a weighted average across source projections for each channel. Does not include state and local government employees, or those employees not offered insurance by their employer; higher totals due to ranges. SOURCE: Aon 2013 experience; US Department of Health and Human Services; Kaiser Employee Benefit Survey; Strategy& analysis

HDHPs front-load costs to patients, and in many disease areas, this may disproportionately impact pharmaceutical spending compared with other medical costs of the patient. And with consumers paying out of pocket, different choices will be made at the pharmacy counter. They will buy generics or maybe suboptimal branded drugs – or no drugs at all if the branded drug is too expensive and there is no generic alternative. The

onus is now on pharmaceutical companies to expand their patient access programs, make their products easier to afford or finance, and/or build an overwhelming case for the cost/benefit in the eyes of patients who can afford a branded product. Winning pharmaceutical companies will educate people to become savvy consumers not only of drugs but of medical care in general. With that help, patients will be better equipped to answer questions that they would once have asked a nurse or physician: Is my treatment working? Which side effects are serious, and how can I manage them? Is a branded drug worth the additional cost for me in particular? At what point should I advance to more aggressive therapy options?

As one example, Sanofi’s Global Diabetes Division, launched in 2010, set out to become the world’s leading diabetes care company, adopting a diabetes treatment model focused on the patient as the primary targeted customer while providing additional tools and support for providers. Sanofi called this being “a ‘360°’ partner of the patient: delivering best-in-class and integrated solutions to diabetic patients … through the integration of new pharmacological targets and innovative approaches and the seamless connection of diagnostics, treatment and monitoring.” The strategy included a full range of products and services, monitoring devices, oral and injectable therapies, mobile applications, and patient

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BioPHarma strategies
Exhibit 2

Health System Consolidation And Physician Affiliations Physician Alignment By Archetype
 Independent

 Uncoordinated

 Consolidating

 Innovating

 Advanced



(~317K) (~93K)




(~126K) (~17K)





















SOURCE: PwC provider health system data; Kaiser State Health Fact; Strategy& Analysis

Number of physicians in advanced archetype increases by 27 percentage points

education. Results included improved patient outcomes as well as a 15% increase in insulin sales. (See “Owning the Disease: A New Business Model For Medical Technology Companies” — IN VIVO, December 2011 and “The End Of Drug Innovation In Diabetes?” — IN VIVO, February 2015.) In another example, Ironwood Pharmaceuticals Inc. partnered with Forest Laboratories Inc. to encourage patients to discuss irritable bowel syndrome symptoms with their physicians. Prior to the campaign, many patients thought their symptoms were not worth reporting and only 10% knew there was a branded treatment option. Empowering patients to be active participants in their care can result in better outcomes – and three months after the ads started, Ironwood’s total market share had increased by 36%.

Trend 2: Tightly Controlled Clinical Care
Independent physicians were once the target of marketing by pharmaceutical companies because they made the lion’s share of prescription choices. Now they are disappearing from the provider landscape,

as health care systems consolidate and bring physicians under their corporate umbrellas. Few independent physicians can deal with declining reimbursement rates, outcome-driven incentives of the Affordable Care Act (ACA), and the rapid adoption and costs of electronic medical records (EMRs). Consequently, many are affiliating with advanced provider systems, while those systems themselves consolidate. Based on our proprietary analysis, by 2017, less than 40% of physicians will remain independent – and that number will keep falling through 2020. This consolidation, combined with enhanced payment incentives from payors, is accelerating the incentives for and the ability of health systems to tightly manage care. By 2020, 38% of physicians will be working for the most actively managed health systems. (See Exhibit 2.) The integrated provider systems are clamping controls on clinical care more quickly than expected. One type of control is the clinical protocol – which determines what patients will be considered for treatment and, if treatment will be provided, what options are available and in what order. These protocols have real “teeth,” with strong

incentives for physicians to follow the rules. The power of these protocol levers is clearly evident. Physicians’ prescription behavior has already been influenced far more significantly than expected. Pharmaceutical companies’ loss of access to physicians is a compounding factor. Hospital systems often block pharmaceutical sales reps from talking to physicians or even leaving samples of non-preferred drugs. The degree of impact on prescriptions depends in part on which of the following four archetypes of consolidation a health system has adopted. • Uncoordinated: Few end-to-end coordination services; low physician alignment on clinical strategies, and few mechanisms to control; unsophisticated health IT systems • Consolidating: Expanding care coordination services; developing physician alignment; developing enterprise-wide health IT systems • Innovating: Ownership of the care continuum; gaining physician buy-in; in final stages of upgrading to health IT systems to control and manage cost and quality of care • Advanced: Ownership of the care continuum; full physician cooperation with outcome-based compensation; active


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use of health IT (such as EMRs) to measure health and financial outcomes to influence clinical decisions and monitor adherence to protocols Indeed, the more sophisticated the system, the larger the decrease in physicians’ average annual prescriptions for branded drugs: 21% lower for physicians in advanced systems versus those in uncoordinated systems. (See Exhibit 3.) Though protocols can be helpful in achieving better patient outcomes, in some cases protocol developers are basing protocol and formulary decisions on budgetary considerations rather than clinical need. Arkansas Medicaid patients who meet FDA criteria for a costly cystic fibrosis drug (Kalydeco; ivacaftor) have been denied access, for example. (After the patients sued, Arkansas agreed to relax its eligibility criteria for Kalydeco.) And payors are limiting access to the hepatitis C drug Sovaldi (sofosbuvir) to patients with more severe symptoms – even though no clinical justification has been identified. (See “The Price War On Drugs: HCV Competition Finally Sparks Discounting” — IN VIVO, January 2015.)

Exhibit 3

Impact Of Affiliation On Physician’s Prescribing Behavior Average annual total prescriptions/physician
-11% 2,000 1,500 1,000 500 0 Uncoordinated Consolidating Innovating Advanced 1,925 -21% -13% 1,713 1,752 1,523

SOURCE: PwC provider health system data; Kaiser State Health Fact; Strategy& Analysis

For pharmaceutical companies, millions of dollars in sales will be won or lost based on whether their drugs are included in the protocols of large provider systems. It is imperative for pharma companies to have compelling evidence, and an ability to refute poor protocol options, in their engagement with these institutions. To do that, they need a seat at the table when protocol decisions are made regarding how drugs are introduced, in what sequence, and by which criteria for different patients. Using their drug portfolios as proof points for their arguments, pharmaceutical companies can build institutional relationships as experts in different conditions for which they have sufficient breadth and depth of product. Specific tactics include moving beyond the typical approach of building health economics and outcomes research models to prove value – and to measure value and outcomes dynamically. Another option is to incorporate leading-edge thinking on real-world evidence to encourage different dialogues with payors and providers, especially toward preventing their adoption of

rushed protocols or inappropriately delaying adoption of new treatment options. Boehringer Ingelheim GMBH’s partnership with Apollo Medical Holdings Inc. in the development of innovative, evidence-based treatment protocols for COPD is a case in point. The partnership relied on Boehringer’s extensive knowledge of this disease, plus physician training and patient adherence services, to improve care for patients. Pharmaceutical companies that embrace the role of patient educator gain an advantage here as well. By providing targeted information, they can help patients recognize when a drug on the formulary is not working and a different choice is necessary. They also can give physicians data to support arguments for off-protocol treatment of specific patient segments.

Trend 3: Spillover Effects From The Government As Payor And Regulator
Medicare and Medicaid are growing quickly, giving previously underserved populations access to medical care, and absorbing a wave of baby boomer retirees. Services are provided to these populations through two different models: either the government acts as both payor and regulator, providing direct coverage and reimbursement, or the government contracts out programs to commercial private payors, which are responsible for a disproportionate share of

the expansion in these segments. Some of these private payors have mastered the difficult challenge of making money in the Medicare/Medicaid space, where reimbursement rates are low and patient populations complex. They’ve carved out profit margins in these markets by developing innovative cost management approaches such as narrow networks. Now payors are thinking, “If these methods allow us to squeeze out a profit in the government space, let’s more aggressively transfer them to the commercial space.” Among these innovations, two have begun to exert significant influence in the commercial marketplace. First, risk adjustment (RA) has recently been introduced in some states for plans leveraging diagnosis data as the key driver of an individual’s risk score. These plans are increasingly working to improve provider education and engagement in order to positively impact risk scores and revenue. On the commercial side, hierarchical condition category coding methodology has been employed to apply RA in this space. Fixed pools of dollars for transfer payments raise the stakes for plans to master the RA model to ensure that risk scores submitted to the US Department of Health and Human Services reflect the actual risk of plan populations, thus helping to ensure that medical loss ratios are not adversely affected. Second, network quality measures – in-

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BioPHarma strategies
cluding outcome, patient experience, and process measures – have been instituted in Medicare. Given the significant revenue upside, these ratings have become a key factor in identifying likely “winners.” On the commercial side, quality improvement measures are likely to be used to align narrow network products with quality performance incentives. Transparency initiatives are already under way to improve consumer choice at the point of purchase on exchanges. specific to medications and chronic diseases. Another option is to partner with payors to identify risk factors and bolster patients’ risk scores. provider credibility in clinical pathway development (or refuting where necessary) – in general as well as in particular disease areas? • Beyond our company, how can we drive cross-industry efforts to address the implications of the three trends covered here and minimize the likelihood of unintended consequences (such as the unmanageable cost burden of initial out-of-pocket dollars and the potential development/adoption of poorly substantiated protocols)? If you don’t have sufficient confidence in your answers to these questions, now is the time to identify strategies to counterbalance the pace and extent of the forces shaping the US health care system. IV A#2015800042 Rick Edmunds (rick.edmunds@strategyand. is a senior partner and leader of the global health care practice, Joyjit Saha Choudhury is a partner and Nelia Padilla is a principal at Strategy&. Paul D’Alessandro is a partner at PwC.
RELATED READING “Owning the Disease: A New Business Model For Medical Technology Companies” — IN VIVO, December 2011 [A#2011800207] “The End Of Drug Innovation In Diabetes?” — IN VIVO, February 2015 [A#2015800023] “The Price War On Drugs: HCV Competition Finally Sparks Discounting” — IN VIVO, January 2015 [A#2015800021] Access these articles at our online store

Take Your Pulse
High-deductible health plans and tightly controlled clinical care are impacting access to branded drugs more quickly than anticipated. Overlapping of government and commercial tactics creates the potential for an even steeper slope of change. As a pharmaceutical executive, here are the kinds of questions you should be asking your organization now: • How well do we understand the longerterm impact of health reform and how it will change the dynamics of the marketplace? What will this mean for our particular portfolio? How well have we thought through consideration, access, and adherence impact on different therapeutic areas and products due to affordability, budget, and financing challenges? Have we evaluated protocols and clinical pathways on adoption of and preference for different medicines? Have we assessed the likelihood of further benefits and risks in more of a “winner-takeall” model? • To what extent are we strengthening our company’s capabilities to manage the pressures unique to our portfolio? Are we doing enough to meet customer needs and differentiate ourselves in terms of patient engagement and support services? Are we guided by real-world evidence and payor/

Blurring the lines between government and commercial tactics will accelerate the impact of the first two trends. For example, the combination of reduced autonomy of physicians and the narrowing of networks further reduces the number of branded drugs being prescribed. Increased Medicare Advantage enrollment in plans managed by commercial payors is driving additional changes in premiums and out-of-pocket costs, while reducing benefits and restricting provider choices. Large payors will also enjoy greater control of the market, with insurers unable to absorb the financial impact of reduced reimbursement rates. Pharmaceutical companies need to stay on top of payor trends in government programs in order to prepare for changes on the commercial side as well as to exploit opportunities. Looking for ways to leverage the quality measure rating system is one option – of the 50-odd metrics, several are

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